Divine gets heavenly $61M
by Clifford Carlsen
TheDeal.com
Updated 08:54 AM EST, May-31-2002
The third time was the charm for Oak Investment Partners, as repeated overtures at incrementally declining values finally paid off in a bid for Chicago's divine Inc.
The Palo Alto, Calif., venture capital firm will sink $61 million into the troubled software and services company in exchange for about 25% of its equity. The deal, judging by divine's rising shares Thursday, May 30, already appears to have saved it from a downward spiral.
In separate infusions of $23 million and $38 million, Oak will pay $6 a share for divine stock, and receive warrants to buy another $9.5 million worth. Oak has agreed to hold its shares for a year, by which time divine's audacious gamble on a rollup of money-losing ventures will likely have proven itself out.
Divine's paradoxical history includes 32 acquisitions over the last 18 months in an attempt to become the leader in Internet hosting and services even as its market capitalization kept plummeting.
Divine CEO Andrew "Flip" Filipowski has projected profits by the fourth quarter of this year, despite massive losses dating to the company's formation in 1999. In the first quarter of this year divine lost $70.9 million on revenue of $146.3 million, representing about $4 a share.
Filipowski said the new investment will provide a cushion, and that it succumbed to Oak only because of larger market concerns about its viability. He said the company had $80 million in cash at the end of March, and that it expects to burn only an additional $40 million before beginning to turn generate cash.
Additionally, the company will pick up $90 million in cash from its recently announced acquisitions of Viant Inc. and Delano Technology Corp., giving divine a war chest of nearly $200 million after the Oak deal.
"We weren't looking for money, and had turned down term sheets from them twice before," Filipowski said. "But the one thing I worried about was questions about our viability, and with companies like IBM and Cisco being questioned I realized that in today's environment you need a stellar balance sheet."
Given the resistance to Oak's earlier interest at higher valuations, and Filipowski's reports of other investor rebuffs, some see the move to sell more than one-quarter of the company as desperate.
Others see it as shrewd.
"It just depends on what side of the glass you are looking at, if you see it as half empty this is a sign of desperation," said Allen Cinzori, an associate with the Software Equity Group LLC, an independent M&A advisory group in San Diego. "If you see it as half full this shows that they have a strategic plan that Oak bought into and agreed that at some point this will be a profitable and valuable company."
Wall Street mostly looked at the deal from the full end of the glass, sending Divine's shares up 24% Thursday. That's after they fell Wednesday to a split-adjusted low of $4 a share compared to an August 2000 high of more than $300 a share.
Figures announced for the deal reflect a 1-for-25 share stock split effected on May 29, after shares traded for 16 cents.
Although the Oak deal comes at a lower price relative to earlier offers, Filipowski said the 30% premium on its most recent stock price is larger than premiums offered previously. Divine, which used no outside financial adviser in the deal, employed the Chicago office of Los Angeles law firm Katten Muchin Zavis Rosenman.
Filipowski's asserts the Oak deal validates his insistence that the one-time Internet incubator can cobble together a diverse, successful company from a hodgepodge of sometimes disastrous startups.
After writing down $113 million in 2000 for a string of startup busts, including cosmetics retailer BeautyJungle.com Inc., online aluminum marketplace Aluminum.com Inc., recycled auto parts marketplace iSalvage.com Inc. and accounting software company FiNetrics Inc. of Lisle, Ill., the former Divine Interventures Inc. pulled up its socks and began an acquisition tear.
In 2001, it bought eprise Inc., Open Market Corp. and Data Return Corp. for more than $300 million.
This year, the company bought more, capped by the April announcement that it will issue stock worth $86 million for Viant Corp.
Divine aims to dramatically cut costs at its acquisitions, and the company claims to have reduced its burn rate by an annualized rate of $45 million this year. Filipowski said it will reduce expenses by another $40 million annualized.
Some are skeptical that divine's business plan represents a coherent business. Its collection of Web services, software, hosting and professional services businesses have lost much of the talent that represented their initial promise, at the same time that computer industry giants including Microsoft Corp., IBM Corp. and Oracle Corp. have invaded its markets.
Filipowski said the company will pursue more acquisitions, even as it bears down on its profit deadline of the fourth quarter. So far, he said, divine has retained pieces of each of the companies it has acquired. But others question whether it can continue to do so.
"They have been on this acquisitions binge but in many ways it is still hard to discern exactly what they are going to be once they are finished," Cinzori said. "It is hard to see what they are going to keep at the end of the day, and they certainly are not going to keep all of it." |
